The Real Stake of the U.S.-China Trade War

Narration: The U.S. and China have entered into the final phase of trade talks while China has risen from a near collapse of its economy. Is a sweeping trade agreement still possible and will it be honored by China?

Gordon Chang: I don’t think Beijing has any intention of honoring its promises on changing the structure of its economy.

Narration: One of the biggest proponents of a trade war between the two countries is Wall Street. Why?

Roger Robinson: The number of companies that are in our capital markets today that are Chinese, we find that some 600, over 650 such enterprises are there.

Steve Bannon: Do you think for a second, that these people do not fully understand what’s going on? Of course they do. But they have a higher calling, and that’s money.

Host: At that moment I thought about 1989, Ronald Reagan. What did you exactly mean when you said we can take down the whole thing?

Title: The Real Stake of the Trade War

Host: Welcome to Zooming In, I am Simone Gao. A tweet from President Trump came in yesterday morning when I was preparing to record these opening remarks. His tweet changed the entire dynamic of the final phase of the U.S.-China trade talks. The president wrote that the U.S. would raise the tariffs on $200 billion of Chinese goods, from 10% to 25%. He also wrote: “The Trade Deal with China continues, but too slowly, as they attempt to renegotiate. No!”

Chinese stocks tumbled along with the yuan a few hours after this tweet. The stock market lost 2.8 trillion yuan in value and the offshore yuan fell as much as 1.3 percent to 6.8 per dollar, its lowest since Jan. 10th. The president is taking yet another tough stance on China. Is this the correct position? What is going to happen at the final phase of the U.S.-China trade talk? What really happened on China’s side in the past few months after Xi Jinping accepted almost all U.S. demands? Is there a small window where the U.S. can give China the maximum pressure? And who is the biggest lobbyist for the CCP in the U.S.? In this edition of Zooming In, we will explore these questions.

Part 1: A rare opportunity

Narration: On May 1st, the U.S. trade team returned home from the latest negotiations in Beijing with three key messages: One, both sides are hopeful that a final U.S.-China trade deal could be struck in a couple of weeks; two: China’s subsidies to key industries remain unresolved; and three, the two sides disagree on whether to immediately remove existing tariffs or keep them in place as an enforcement measure to make sure Beijing honors its word.

Narration: U.S. Trade Representative Robert Lighthizer told a Senate committee on Tuesday that “there still are major, major issues that have to be resolved … and if those issues are not resolved in a way that’s beneficial to the United States, we will not have an agreement.”

Narration: On May 8th, Chinese Vice Premier Liu He will lead more than 100 officials to Washington for another round of negotiations. Major news outlets predicted a likely deal and the U.S. may accept terms less sweeping than it had originally sought.

Host: After President Trump’s tweet, the media might have changed their mind on whether the U.S. will accept a less sweeping deal. What Zooming In wants to point out here is that four months ago, when we covered the Trump-Xi summit at G20, the dynamic of the talk was quite different. Back then, Chinese president Xi Jinping gave the impression that he did everything to prove his sincerity and accepted almost whatever the American hawks demanded in order to prevent imminent U.S. tariffs on $200 billion of Chinese goods. At a press briefing after the G20 summit, Larry Kudlow, the director of the National Economic Council, said this:

Larry Kudlow: This one covers so much ground and so much detail. We’ve never seen this before. And furthermore, we’ve never seen the hands-on participation by President Xi before. In fact, that dinner was quite remarkable.

Narration: According to the American team, not only was substantial ground covered in the meeting, but the Chinese team used an important word: “immediately.”

Larry Kudlow: When we met with Vice Premier Liu He, he said several times—and I pushed him on this—that the China changes, with respect to tariffs and non-tariff barriers and other structural issues that we’ll get into in a few moments, would begin immediately.

Host: The biggest outcome of the G20 meeting was that the two parties agreed to a temporary ceasefire for 90 days in order for negotiations to continue. If no agreement could be reached, the tariffs on $200 billion of Chinese goods would take effect on March 1. However, that deadline was again postponed as March approached. When the two countries met again at the end of April, no words such as “immediately” surfaced from the Chinese, and the sense of emergency seemed to have disappeared from the Chinese side. What happened during the past few months?

Narration: In March, in an attempt to stimulate the economy, Chinese Premier Li Keqiang announced a tax cut of 2 trillion yuan, a multi-trillion yuan infrastructure investment and increased loans to small and medium-sized enterprises by 30%. These measures have yielded results. China’s exports exceeded expectation. Real estate sales went up, the stock market jumped 33% from January to April, and foreign exchange reserves marked a 8.58 billion dollar increase compared to the same period last year.

Narration: The Chinese economy has largely been stabilized from the turmoil it experienced at the end of last year.

Narration: In the past three years, China was going through a painstaking de-leveraging in all sectors of its economy. That was to cut down debt and speculative investment, a widespread practice by Chinese companies to accumulate great wealth in a short period of time. This behavior was largely prompted by the Chinese government’s 4 trillion yuan stimulus plan during the 2008 global financial crisis. The amount of currency issued to the market caused high inflation and huge debt problems throughout China.

Narration: When President Trump started the trade war against China in April 2018, China was deep in deleveraging. As of the end of December 2018, the market value of most listed companies in A-shares fell by 80%. The Chinese economy nearly collapsed.

Narration: Precisely then, Trump and Xi met at G20 when Xi agreed to almost all U.S. demands, and in turn, America agreed to a ceasefire and postponed tariffs on $200 billion of Chinese imports, not once, but twice. This gave the Chinese economy critical breathing room. Confidence was quickly restored and so were the numbers.

Narration: According to top experts from China International Trust Investment Corporation, deleveraging will be realized at the end of 2019 in the financial sector and early 2020 for non-financial sectors.

Host: While problems still lie ahead, China is now on or ahead of schedule for completing the deleveraging and stabilizing of its economy. It has successfully persuaded the U.S. to pause tariffs at its most vulnerable moment while domestic pressure for President Trump to make a deal with China is increasing. Who are the proponents of such a deal? At a recent event by the organization “Committee on the Present Danger: China,” Roger Robinson, an expert on financial security, who helped craft Ronald Reagan’s policy for dismantling the Soviet Union, pointed out one group that is getting increasingly intertwined with Chinese companies.

Roger Robertson: So when we look at the number of companies that are in our capital markets today that are Chinese, we find that some 600, over 650 such enterprises are there. They’re probably around 86 in the New York Stock Exchange, 62 in in Nasdaq, and over 500 in the over-the-counter market, which is, as you know, the least regulated and the most popular for those seeking to skirt transparency and disclosure requirements. So here is a wide spectrum of companies. Many of them would be seen politely put as high risk entities, less politely put [as] outright bad actors.

And I’m talking about national security abusers of all stripe as well as human rights abusers. And we can talk about some hard examples of this, but we’re not unfortunately talking about a few tens of millions of dollars. We’re talking about hundreds of billions of dollars and moving rapidly toward $1 trillion. Now that’s a lot of financing that’s being attracted from unwitting American investors.

How many people do we have in our country, in the markets today? 180 million and 200 million Americans, I don’t know the number, but you can appreciate that it’s disturbingly high, and when you look at the pace at which the Chinese are coming into our markets for dollar financing, which they’re desperate for you, you start to see a trend where trillions of dollars are going to flow into our markets over the next two to three years to such an extent that it is conceivable that one morning the American people wake up and find, whether it’s 12%, 15%, 17%, some high number of their investment portfolios of their retirement portfolios are Chinese securities. Well guess what happens that day? The China lobby, as we know it today, appears to be a trivial asterisk next to what’s coming, when again, these folks realize that any American penalties or sanctions toward China based on it’s malevolent behavior could and probably would devalue or damage the value, another way to put it, of their retirement and pension systems.

Narration: This relationship goes both ways. Major Wall Street investment banks such as Goldman Sachs, JP Morgan, JPMorgan Chase, Blackstone, etc., all have significant investment in China. Major American corporations such as Apple, Wal-Mart, Boeing, Intel, Qualcomm have all made great fortunes in China. A large number of family members of top Communist cadres work for these companies. And these red families with great wealth also have immense investment in the American stock market. How close is the relationship between Wall Street and the communist regime? Former White House Chief strategist and former Goldman Sachs executive Steve Bannon said this:

Steve Bannon: What Xi, and you gotta remember, when he’s at Davos and they’re all sitting there, you know all the McKinsey guys, all the Booz Allen guys, all the law firms, all the accounting firms, Goldman Sachs, my old firm, all the commercial banks, all of them, they’ve went to the best schools in the world, they work in the smartest place in the world, they’ve got total information at their fingertips. You’re telling me they don’t know about the Uyghurs? They don’t know about the underground Christian church? They don’t know about the underground Catholic Church? They don’t know about the Dalai Lama? They don’t know about the social credit score? They do not know about the enslavement of the Chinese people? Sure they know, and they don’t care.

Host: Bannon went so far as to say corporate America is the lobbying arm for the Chinese Communist Party and that Wall Street is their investment relations firm. Listen to this heated discussion Bannon had on CNBC.

CNBC: Really? Corporate America is funding the Chinese Communist Party?

Steve Bannon: 100 [percent]. By the way, the entire operation of the Chinese Communist Party and what they’re running in China is being funded by Wall Street, which Kyle can walk through, being funded by Wall Street and corporate America. Remember, PBS or NPR had this thing the other day about intrusions and the stealing intellectual property in American companies. They talked to a treasury official that went around to 200 companies, not one company that had been stolen from would press charges, because they didn’t want to be blocked out of China.

Corporate America today is the lobbying arm of the Chinese Communist Party, and Wall Street is the investor relations department. You can see this on President Trump’s trade negotiation, which I say is basically an armistice on the economic war. When Liu He comes to the United States, where does he go first? He goes to meet, he had a lunch, this is about two months ago, he comes, the first day he had lunch with representatives, the government affairs guys, and the COOs, and the presidents of the biggest companies in China [and America] to put pressure on President Trump. All the pressure coming from President Trump to get a deal is not from the Chinese, it’s from Wall Street, it’s from industrial America.

Host: I asked Roger Roberson the same question: How much pressure does President Trump receive from Wall Street on the U.S.-China trade talks?

Roger: It’s a matter of record that the president’s been under a great deal of pressure on the trade talks from various lobbies. Everything from agriculture to finance, financiers on Wall Street. So I do believe that this level of engagement particularly on the financial side is such that there is a huge constituency that wants a trade agreement almost irrespective of its content and soon. So I do think there is a great interest there but there is relatively little connection between China’s activities in the capital markets and the trade talks in the minds of most people. I think that Wall Street is making huge fees on the China dimension. And they are seeing some impressive returns in some cases as well. So there’s great enthusiasm and you can see it in the number of Chinese companies that are being added to the MSCI Emerging Market Index. And more recently the Bloomberg Barclays Global aggregate index.

Narration: Coming up, can the Chinese Communist Party ever be trusted?

Part 2: Can CCP Ever Be Trusted?

Narration: On Oct. 9th, 2018, at the Center for Strategic and International Studies, Dr. Peter Navarro, assistant to the President and Director of Trade and Industrial Policy, recounted the promises China has made to the U.S. in recent years.

Peter Navarro: The game that China has played—and they played people in the Bush administration like a violin—is to do the tap dance of economic dialogue. That’s all they want to do. They want to get us to the bargaining table, sound reasonable, and talk their way, while they keep having their way with us. And this is, I mean, look, here’s all you need to know when you think about the prospect of a deal, okay? We had a high-ranking member of the Chinese government agree with Barack Obama on two things back in 2015. Two things, okay? The Chinese official agreed to no militarization of the South China Sea. Within two years those artificial islands were armed to the teeth. The second thing that official agreed to was to stop hacking American businesses. Yeah, well, that lasted about six months, and now the U.S. government will tell you unequivocally that those hacks are back up, they’re serious, and they’re coming to get us.

Host: To people who are familiar with the history of the Chinese Communist Party, this behavior is not surprising. It has been consistent throughout its history. In the wake of the second World War, this is one of the key tactics the CCP used to defeat the Kuomintang to take control of China.

Narration: After the Japanese were defeated in 1945, a full-scale civil war between the Communists and the Chinese Nationalists represented by the KMT resumed. The KMT was the official Chinese government recognized by the international community at the time. The Communist army, previously a minor faction, grew rapidly in influence and power and eventually defeated the KMT.

There are many reasons why the KMT was defeated, but one of the main tactics that the Communists used repeatedly during the civil war was the so called “cooperation talks.” What happened was that whenever the Communists were on the verge of losing, they initiated so-called “Peace Talks” or “Cooperation Talks” with the KMT. There were three such “cooperation” talks altogether. The agreement from the last talk in 1945 recognized the legal state of the KMT government and agreed to end the civil war. The Communist Party did not honor that agreement and kept fighting until they expelled the KMT from mainland China.

Host: The CCP has been in power ever since. Today, the Trump administration demanded structural changes to the U.S.-China trade relations. This was essentially asking the CCP to change the way it runs its economy, the way it runs its country and basically a political reform of some sort. I asked Gordon Chang, a columnist and China expert if China will really do it, and he said this.

Gordon Chang: I don’t think Beijing has any intention of honoring its promises on changing the structure of its economy. Remember, Xi Jinping believes in a state-dominated system. And during his tenure, we’ve seen state enterprises crowd out the private sector, not just foreign companies, but also the domestic Chinese private sector. So what we’re asking for in our trade talks with the Chinese is for them to completely change the state-dominated system and go to a free market economy. That’s just impossible. Xi Jinping is not going to do that. So I don’t think that we can change China with a trade agreement. We had so many trade agreements with the Chinese and they violated them all. Why would they start honoring their deals under Xi Jinping who is basically a believer of the Maoist state-dominated China?

Narration: Coming up, what should the end goal of the trade war be?

Part 3: Reagan’s Economic Warfare Against the Soviet Union

Host: 32 years ago, when President Reagan gained insight into how vulnerable the Soviet Union’s economy was and how they feared his SDI program, he didn’t hesitate to make a decisive move to bring down the whole thing. Is Reagan’s rationale still relevant today? Let’s revisit what happened in the 1980s.

Narration: By the winter of 1986, President Reagan had come a long way in combating the Soviet Union during the cold war. Reagan agreed with Churchill that the Soviet Union only respected strength and resolve in their dealings with other nations.

Narration: President Reagan started a multi-billion-dollar modernization of U.S. strategic forces to regain a military advantage over the then more powerful Soviet Union. Among those efforts was the Strategic Defense Initiative (SDI), also known as Star Wars, an initiative aimed at rendering nuclear weapons impotent and obsolete.

Narration: While trying to keep up with the Star Wars program the Soviets went bankrupt. The Soviet Union increased defense spending by 45 percent. They also suffered from Reagan’s other measures. They lost billions in oil sales thanks to Reagan’s strategy in boosting Saudi oil production. They had to spend billions more on third world dictators. They could not keep up.

Host: It is not an over statement that President Reagan’s economic warfare brought the Soviet Union down. Is his thinking still relevant today? Ten months ago, I came across this short video of Steve Bannon being interviewed at the Delivering Alpha conference. It reminded me of Reagan’s thinking in 1987. Take a look.

Steve Bannon: It’s not just the trade, it’s the scale and the depth of the trade. In the way Trump proposes it, he says, it’s 50, it’s 200, it’s supposed to be 100, it’s 200, and it’s another 200 if you retaliate, and by the way, if you even retaliate again, it may be another 500. He’s talking about right now a half trillion dollars. That’s just one. The 301s is what silicon valley came to us about. It’s not the technology theft, it’s the forced technology transfers, the third part’s the ZTE, where we could basically implode these companies.

MSNBC host: I’m trying to game this out.

Steve Bannon: Yeah, here’s the game. Right now, we’re converging on a point and they understand this, we could take the whole thing down. We could take, the whole thing’s built on a house of sand.

Host: We can take the whole thing down. I always wanted to ask Bannon what he meant by that, so I did at the Present Danger: China event:

Simone: One thing you said during that interview is, we can take down the whole thing. We can take down the whole thing. I don’t know if you still remember it, but that line just struck me. At that moment I thought about 1989, Ronald Reagan, you know he doubled down SDI after he walked away from Gorbachev and stuff. I even did a program comparing these two historic moments: Trump’s trade war and the 1989 moment. So I want to ask you, what you mean exactly when you said we can take down the whole thing.

Steven Bannon: It’s just like 1989. Remember, the Soviet Union collapsed because the West put pressure, but it was the people enslaved in Eastern Europe, and in Russia, and the rest of the Soviet Union that brought the system down. At some point of the day they said, we’re not gonna do this anymore. The whole system collapsed in a couple of months. And it was so dramatic, you know, no shots fired.

The way that the radical cadre that has enslaved the Chinese people, and that’s what happened here. They’ve enslaved the Chinese people. The way to bring that down is the Chinese people have to do that, and what the West has to do, and I think you’re seeing it start to come together, not just president Trump’s trade, you know, to engage in this confrontation China’s had in this trade war.

That’s one element. The other element is to militarily, to least be aware like in the South China Sea, the East China sea, in the defense of Taiwan, the defense of Hong Kong, the rights of the people in Hong Kong, the implementation of the deal that we cut in, you know, the one nation, two systems, which is being totally thrown out the door, right? The Hong Kong people are now being enslaved. The people of China will stand up because they want freedom.

They understand what they can do with freedom, right? The great economic powerhouse they can have. And so I think it’s incumbent upon the west to assist them in that, and that I think the whole thing can collapse, I think the entire radical cadre, the CCP, the whole thing can collapse. You can see rule of law, you can see democracy, you can see all of it come to the Chinese people.

Host: Steve Bannon applauded President Trump’s increase of tariffs on $200 billion of Chinese goods, saying this is the biggest day of his presidency. The U.S.-China trade war caught China off-guard when it was in its most vulnerable economic moment. The trade war speaks to much deeper issues than trade itself and the result of it could also go much further beyond trade as well. It all depends on how this historic moment is being handled. Stay tuned, Zooming In will bring you perspectives on the U.S.-China trade war you won’t see anywhere else. Let me know what you think on Twitter @zoominginSimone. You can also join the conversation on our Facebook page or subscribe to our YouTube channel at Zooming In with Simone Gao. Goodbye until next time.